Is it any wonder first-home buyers baulk at what’s on offer?

Regardless of the accuracy of the Demographia report, Australia’s housing market is definitely unaffordable for those trying to get into it. Analyst Catherine Cashmore explains why.

So is Australia’s housing market “unaffordable” or not?

What we really lack in Australia is a realistic vision of how our housing market should appear. There are too many conflicting voices smothering the debate — from a myriad investors looking to profit from rising prices, hoping they’ll outpace inflation to enable retirement on a pot of “property gold” to consumer organisations struggling to address the growing mountain of citizens requiring public housing or rental assistance.

Even with the peak-to-trough fall in house prices over recent years, with the median dropping nationally a little in excess of 6% coupled with an easing of lending rates to a little over their post-GFC record low, residential property prices in Australia still remain far too high for a large proportion of first-home buyers — the majority of whom don’t stand a chance unless they benefit from a deposit cash injection gifted by family or friends.

The annual Demographia Housing Affordability index, which generates the same media headlines year in year out, has once again highlighted what it claims is the “severely unaffordable” nature of our housing. However, last week its findings were disputed by APM senior economist Andrew Wilson, who suggested because there were buyers “buying” property housing couldn’t be all that unaffordable? After all, suggested Wilson, prices were rising in Sydney, banks were lending, and there has been “activity” in the marketplace of late.

As Wilson is well aware, the reason prices continue to rise in Sydney (and other metropolitan areas) can be directly attributed to decades of poor planning for population growth by both state and federal governments, which have ensured a majority of buyers remain well and truly hamstrung to the inner and middle suburbs of our capital city locations. In this respect, Sydney is no different to New York and London — these cities are also on an upward trajectory due to shortages of affordable supply (despite the woeful economic climate both countries face).

To some extent this places a “floor” underneath the cost of metropolitan housing in the highly sought-after areas of our capitals and hence, investors can still be fooled into thinking there’s no “ceiling” to price inflation. Despite low consumer confidence and our new aversion to debt, the crystal ball predictions of annual 10%-plus rises in house values continue.

But it doesn’t mean housing falls under the definition of “affordable”. Household debt to disposable income in Australia stands a little below 150% — high by historical standards and certainly not healthy. We’ve borrowed more in order to pay more.

As for any perceived “activity” in the marketplace — putting aside the woefully low transaction figures of late, which although stabilising, are at levels not seen since the late 1990s, and a construction sector that is struggling to recover from an 18-month low — it seems the remaining buyers active in the market arena are investors and second-home buyers. As far as first-home buyers are concerned, the latest home loan data from the ABS shows a significant fall in the sector nationally (down to 15.8% in November 2012 from the 18.7% high recorded in October). It couldn’t paint a clearer picture.

Outside of the “carrot and stick” approach of grants and incentives — which disproportionally spike housing costs and activity, thereby forgoing any perceived benefit while the grants remain in place — first-home buyers are not showing any great enthusiasm to buy into the Aussie dream. If you took a national survey the majority would tell you in no uncertain terms, and probably not quite so polity as expressed here, Australian real estate is both inflated and unaffordable.

Exaggerating the problem is the long-term trend, and overwhelming preference from this demographic when they do step in is for established dwellings over new. It should come as no surprise — new houses are generally located in outer suburbia away from family, friends and any hint of an adequate supply of social amenities. High-rise dwellings are built on the mantra of “squeeze as many in as possible” and better resemble a rabbit hutch than an abode to call home.

Buyers who do move outwards tend to be families upsizing to larger four and five-bedroom properties and therefore make the choice to compensate distance (and the cost of a commute) for an increase in accommodation. First-home buyers on the other hand would rather take a smaller property to purchase closer to the hub and bub of city amenities — thereby favouring apartments.

“It doesn’t have to be this way — there are many things both government and planning authorities can do to increase the supply of both affordable and quality accommodation.”

There’s a further problem in that. Banks don’t like lending to first-home buyers for high-rise dwellings — so any suggestion to build as many as possible to ease supply is of little benefit to this sector. And construction has often proven to be overwhelmingly poor, owners’ corporation fees high and purchase prices simply do not represent value for money.

On the other hand, established dwellings hint of an era when property was built with the home buyer in mind. Unlike new dwellings, which come with a “wow” premium on the initial price, older properties offer the potential to buy in at a lower cost and renovate. The floor plans in apartments are generally more spacious and the low-rise facade is in keeping with the predominant street aspect.

Living in a smaller block with an owners’ corporation of 12 occupiers is highly preferable to a high-rise monstrosity that contains 150 offshore investors who won’t be so actively motivated to pay future levies for long-term building improvements and general upkeep. It’s no wonder first-home buyers prefer the option.

Of course, local investors under our current system of negative gearing also prefer established over “new” and therefore, considering our current terrain low fixed interest rates, and rising yields, it should come as no surprise that when a first-home buyer does come across an attractive property seemingly priced within their allocated budget, when faced with competition from an investor, the first-home buyer won’t be the one leaving the property with a signed contract in hand.

Research from RateCity suggests it takes an average single income wage earner on $70,000 per annum five years to save a deposit — with more than half of buyers in their 20s receiving help from family and friends. Other analysis based on ABS borrowing figures places a single-income first-home buyer’s budget around the $300,000 mark. To purchase something larger than a one-bedroom apartment at that price in Victoria, you need to head some 25 kilometres outside the city to areas such as Melton and Werribee. Is it any wonder our “new” buyer market is diminishing?As for the Demographica study, comparing property markets across the world is difficult due to the way statistics are collated, with some markets substantially less transparent than others and each having its own unique demographic and structural requirements. Australia and Hong Kong are both classed as “severely unaffordable” — but I’d guess you’ll find far more attractive living options in Australia for $350,000 than Hong Kong, where most are confined to an apartment in the sky.

The survey rates each selected country by dividing the median house price by the annual median pre-tax wage. This places Sydney’s “median multiple” at 8.3 and Melbourne’s “median multiple” at 7.5

I’m not a fan of the methodology — comparative “medians” are a poor way to analyse effective cost. But the result of the survey speaks volumes for a growing demographic of first-home buyers wanting more than a dead duck of a property in outer suburbia, or a boxed-sized room in the clouds. As far as this demographic is concerned, Australia’s real estate — at least the options worth buying — is “severely unaffordable”.

It doesn’t have to be this way — there are many things both government and planning authorities can do to increase the supply of both affordable and quality accommodation.

For example, if you dig down deeper into one of the previous International Housing Affordability surveys, there is an interesting picture painted comparing Sydney and Melbourne with Dallas-Fort Worth and Atlanta in America. In 1981 both cities in the US were a similar size to our biggest capitals with similar rates of projected population growth — but unlike Melbourne and Sydney, authorities in Dallas and Atlanta ensured cheap land was made available on the outskirts of their cities and, more importantly, Dallas and Atlanta expanded train lines into the new suburbs as part of the plan.

Consequently, neither city suffered the same level of price inflation we’ve experienced in Melbourne and Sydney, and Dallas now boasts the largest light rail system in the United States, with further plans to expand into the outer-suburban locations as part of its 2030 plan.

The property market in its current capacity has little interest in the ethics of providing shelter or affordable accommodation: it’s a money-making vehicle, and as long as someone out there is willing to pay in excess of a $500,000 for a modest one-bedroom apartment with the mindset that it will be worth a lot more when they sell — regardless of their means to fund the purchase — the debate over whether our market is “unaffordable” will fall on deaf ears within both the property industry itself and the political domain.

As such, the addiction to “building wealth the property way” will continue to the determent of increasing numbers of individuals who will struggle to rent, let alone buy.

*Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition. This article was originally published at Property Observer.

I agree housing is unaffordable, but the less often raised issue - which this article does touch on - is that a lot of the construction in the boom has been simply bad. There are massess of appartments available in Canberra - and almost none of them have the sound or thermal insulation you would want in an owner occupier dwelling. I’m not talking about excessive standards, I’m talking about not having to agree on a TV channel and date night with your entire floor. If you are going to drop 500K on something you want the product e.g a fit for purpose dwelling. And it just is not available, largely because the politics of development have been in favour if maximising investor profits with nothing which passes for consumer protection in most other products.

Fear not, Catherine, there is a small group of “housing market” enthusiasts who appreciate and applaud your rare voice of reason on housing affordability.
Surely there are some votes to be garnered by political parties who offer policies to assist the voters and the businesses affected by this “Market”?
Appearing on real-easte signs in my area is confirmation of the phenomenon of “Land-Banking”, where owners are told of the option to leave their houses empty and rely upon capital gain to “obliquely” pay for their costs, while avoiding the hassle of tenants.
Ironically the laws of supply and demand ensure these capital gains by restricting the supply of homes.
(Chuckle, chuckle insider trading?)
With none of the champions of “free-market” competition seeming to notice.
One such closed market seems to be enforced in the conservative stonghold of Shoalhaven, centred on Nowra on the NSW South Coast.
Here, in this market, we see an early test of the Baby Boomer retirement effect of increasing supply of housing.
The Shoalhaven was a retirement centre for the pre-Baby Boomer generations and now those generations are quickly passing on or are in retirement homes.
And their homes are increasingly being Land banked by the consortium of local real-estate agents, in order, clearly, to put a “floor” under rents and property prices.
Cannot help but recall a blatant Brisbane Courier-Mail Front-page “Free-Advertisement” from Winter 1996, with the local real-estate institute calling for an across the board, $20/week rise in rents, in order to make the expense of owning a newly built, but persistently “undersold”, house more “Attractive”.
As said before, yours Catherine, is a rare voice of reason.
There is an undersupply there as well as in affordable housing.
Unlike a certain political leader, you are “doing important work for Australia”.

Terrible, terrible comparison to Dallas and Atlanta. Has the author actually been to these cities? Not only do they have market fundamentals completely different to Melb and Syd, they are universally acknowledged by urban planners, policy makers, transport experts etc as the worst examples of how cities should evolve.

You cannot be serious about the effect of the Dallas public transport system, Catherine. It is miniscule. The Dallas metropolitan area has a population of 6.5 million and 4 light rail lines and 1 heavy rail line for a daily ridership of 109,000 (excluding buses). Melbourne has 4.2 million, 28 tram lines, 16 heavy rail lines and a daily ridership of 1.1 million.

Also, Texas has virtually no planning controls - you can build a 60-storey building almost anywhere you want - this is part of the reason why land is relatively cheap.

Moreover, Australian cities are so heavily centralized with government, transport, education, business etc. all focused around the CBDs of just a handful of big cities. That means the CBDs have huge concentrations of jobs - and so everyone is clamoring to be as close to the CBD as possible. This is the biggest reason why city real estate is so expensive. Compare, for instance, the San Francisco area. You have the state capitol an hour’s drive away in Sacramento, major universities in outer suburbs like Palo Alto and Berkeley and major employers (e.g. Google, Apple) headquartered on suburban fringes in Silicon Valley, with some banks still in SF downtown. Most other US cities and states are similar to this. If this were an Australian city or state, however, all of these things would be concentrated in the CBD.

Part of the reason why US cities are decentralized like this, is because downtown areas became very unsafe in the 1960s and 1970s - due to homelessness, drugs, gangs and violence. That meant major companies relocated to the suburbs (the so called “white flight” phenomenon.

So in some ways, Australia’s high property prices are an unintended consequence of how safe and pleasant our CBDs are - we never experienced the “white flight” phenomenon, and we’ve got the property prices to prove it!!

When the various state and federal cadastres or property ownership records finally go on-line perhaps via the NBN then these hitherto inaccessable public records, used in conveyancing at an exorbitant price, will reveal much about the operations of the housing market.
One of the reasons for antagonism to the NBN and the internet?

Many years ago the Sydney CBD started decentralising to Chatswood, Parramatta and North Sydney,
Mainly on the instigation of the boards of construction companies, accessing London Insurance Company money looking for a home and providing post-graduate employment for the former students of the Civil Engineering professors on said consruction company boards.
What? engineers can build massive high rise office blocks but somehow do not know anything about finance?
So are these things all concentrated in the Sydney CBD or not? Somebody might be kidding themselves here?

Building skyscrapers in North Sydney is hardly decentralizing, it is simply continuing the CBD on the other side of the water!!

For decentralization, try relocating the NSW Government to Dubbo, University of Sydney to Goulburn, UNSW to Grafton, and half of Sydney’s corporate HQs to places like Bateman’s Bay and Port Macquarie. Then you may see Sydney property prices starting to ease.

Also, another reason why Dallas and Atlanta are poor comparisons is that they are inland cities. Land is more plentiful, and therefore cheaper, when it is available from all points of the compass!!

Now, now Anders, a Central Business District is by definition, central.
Decentralisation is not quite the same as moving to another city altogether.
In the case of North Sydney the bridge was there for forty years before the skyscrapers moved across.
Supporting the development of regional cities was a policy of the Whitlam government’s Department of Urban and Regional Development.
The project near Albury was called “Whitlamabad” and rorted by land speculation.
Bathurst-Orange was similarly rorted with the land bought up by speculators.
Historically the US, Canada and NZ have been poor takes for land speculation, unlike Australia
Now if there were a New State on the NSW South Coast, the railway line would extend across the Shoalhaven all the way to Canberra, The Shoalhaven would be opened up to coastal shipping as would the Clyde at Batemans Bay and the new state authorities would be encouraging all this with cheap housing land to attract citizens.
We will have to wait until Abbott’s league of extraordinary economic imbeciles totally trash the economy with the recession we had to have, before “foreign” money steps in with the technical solution to your tyranny of distance constraints, harbours and rail-lines from coast to hinterland.
It took sixty years for Newcastle to be finally connected to its inland hinterland.
Port Kembla still awaits its Hinterland rail connection.
All this has concentrated industry in the Sydney Basin at the expense of the rest of NSW.
Great for Capital gains though.
You shall know the truth?
“Then you may see Sydney property prices starting to ease.”
But do not expect Australians to fund any of this; they are caught up in a $trillion of mortgage debt, sucking up $60 Billion every year, Thankyou John Howard.

The failure to plan infrastructure at NSW State level and thereby relieve Sydney property prices is hardly the fault of the Howard Government. A major reason why infrastructure is so difficult to build is the over-regulation of the labour market and overly expensive award conditions - something for which your beloved Labor Party deserves the lion’s share of the blame!!

Yes Anders, unions have won wage increases, but most of those increases have gone to service increased housing costs.
If the federal government annexed the NSW South Coast adjacent to the ACT then some rational land development could be extended to that area to attract and support industry.
Including the reinstating of the cost and speculation reducing practice of 99 year leases which reduced the burden on taxpayers of the wages their public servants.
Anders, perhaps you can ask John Howard why he ended 99 year leases in the ACT and why?
Otherwise the natural progress towards new states, which by reducing land costs can reduce wage costs, is obviously being held up by the real-estate speculation which is cramming too many millions into the Sydney Basin simply to jack up real -estate prices.
And yes the right wing of the Labor party is emulating the conservatives in this collusion to restrict a free-market in housing almost out of existence altogether.
More details are found in “The Economic History of Australia” by Professor Edward Shann, where he describes the control and restriction of the sale of housing land by the early colonial authorities to raise revenue for the Crown.
This trickle-feed price control is now the function of corrupted local governments who guide said profits into the pockets of private interests.
I would not be surprised if the right wing of Labor and the Liberals and Nationals, who collude in this process, call it “The Joke”. The laugh is on everyone outside this charmed circle.
A Royal Commission would not go astray Astraya!

“Of course, local investors under our current system of negative gearing also prefer established over “new” …………

it should come as no surprise that when a first-home buyer does come across an attractive property seemingly priced within their allocated budget, when faced with competition from an investor, the first-home buyer won’t be the one leaving the property with a signed contract in hand.”

Exactly. The current negative gearing regime is both fiercely defended by the industry lobbyists, and also a textbook example of perverse outcomes.

Neg Gearing has almost no social benefit, and yet enjoys exceptional tax benefits. It’s a no-brainer, for a govt with political courage.

Re demographia, I wonder how they feel about the ‘regulation’ that is negative gearing. I’d be ok with much regulation being tossed out, if it included negative gearing. Also toss out any first home buyer’s scheme or other incentives, they just bid up the price.

Points well made above regaridng quality of medium and high rise. The main amenity required for reasonable living and a social community is soundproofing between apartments. Shoddy construction and paper-thin walls are often the case in modern buildings. Buying off the plan is a huge gamble because of it.

Anyone been following some of the ‘World Square’ (Sydney) arguments of late. A classic example of a huge number of apartments, unwieldy management stuctures and legal nightmares.

High-density, high rise is just too risky these days. Perhaps for studios and one-bedders only.

To make housing affordable you have to lower prices or increase income. The latter only occurs in reaction to labour shortages and with our supposed unemployment level at close to 5% but probably much higher to a low participation rate it’s unlikely to go anywhere.

The vested interests, people who already own homes, the banks and the real estate industry would take great umbrage to any government that made more land available or changed zoning to create more inner city housing.

It’s simply not going to happen. The only way the Australian market is going to become affordable is when the bubble bursts and the poor unfortunates caught start with the fire sales.

There is no timetable as to when a bubble bursts just a inevitability.

I am just in the process of purchasing our first house, as 35 & 32 year olds. It is $650K, and we have about $250K saved. I am not thrilled about it, but needs must and we need to get on with things - after waiting a few years, we have found the house previously sold for over $700K so in some ways you could say we have got ‘a bargain’. I don’t think that - I think in a perfect world it should be around 550K.

We earn a large amount more than the average household, and I really don’t know how things have got to this - I understand banks have been loose in their lending (they offered us $1.2M) but I cant not understand that it has taken a majority of people that have decided that the risk is acceptable in order to bump housing to this level.

To those talking about decentralisation - the only state that I believe works well in terms of decentalisation is Tasmania - all other states need to look to the UK and not the US for their development. I feel we are getting there with a great train station at Southern Cross and WH smith - we just need a train system and satellite towns like you do outside of London in England… Having worked in Atlanta before I can just say it takes urban sprawl to a new level and Marta is laughed at by car driving locals. There is a difference between a sprawling city and a city and satellite towns.

I am not thrilled about it, but needs must and we need to get on with things […]

Why ? Why would you not continue to rent (at 1/2 to 2/3 the cost of buying) and save the difference ?

I don’t think that - I think in a perfect world it should be around 550K.

The rule of thumb my wife and I use for mortgage size is that repayments should be no more than 50% of the lowest income. This means one of us can lose our jobs and the ability to service the minimum mortgage payment isn’t endangered. When both of us are working we could sacrifice at least one entire income to the mortgage (and probably more), thus paying it off in a much shorter time.

To those talking about decentralisation - the only state that I believe works well in terms of decentalisation is Tasmania - all other states need to look to the UK and not the US for their development.

Good god, no. The UK is about the worst place on the planet we could be emulating. Even after the GFC, their real estate prices remain absurdly high, because of their incredibly restrictive urban planning.

Why ? Why would you not continue to rent (at 1/2 to 2/3 the cost of buying) and save the difference ?

As we are wanting to have children and have a stable house, as well as the fact that we can get this property and improve it and work on it and hopefully add some value - or at least have land to utilise for our hobbies (gardening, veges, brewing). Renting is about 2/3 the cost of buying, you are right - but the other 1/3 is around the amount of capital you are repaying so if houses stay even stagnant then it is an even bet.

The rule of thumb my wife and I use for mortgage size is that repayments should be no more than 50% of the lowest income

I have roughly the same rule, as long as our costs (total) can be earned by one of us we are OK - and of course have $50K sitting in the bank to mean we could last 12 months with neither of us working. We have a view of 8 years to pay off the house in total.

Good god, no. The UK is about the worst place on the planet we could be emulating. Even after the GFC, their real estate prices remain absurdly high, because of their incredibly restrictive urban planning.

I believe London’s have remained high, but when I was in Newcastle, Sunderland, and Manchester in July our friends had just purchased a house for 145K pounds - they were double this pre-GFC so I believe they have been wound back to more suitable levels (household income is around 45K) - London will always struggle due to its size and layout and I don’t think it is unexpected for such a large city to become so unaffordable - We stayed with friends in Guildford which was only 25 minutes by train (quicker, and substantially nicer than, say, a trip to Cranbourne in Melbourne or Penrith in Sydney) and houses are much more reasonable there.
I have my doubts about Australian property because it doesn’t have the same density and boundaries - but I don’t think any vested interest (land owners, banks, governments) are about to consciously deflate the prices by unlocking land, nor are the sort of transport or alternate towns going to be created in the next 20 years to negate this. So it will either take a massive external shock (China) or a slow change such as potentially a different attitude/culture to working remotely - but even then this isn’t always possible and doesnt factor in the social factors in terms of desirable suburbs and wanting to be close to the city centres. I can see house prices at present flat lining for the next 5 years, which can only be a good thing as money is diverted away from a non-income producing area to something much more productive to improve Australia’s productivity overall.